Ghana: A New Growth Area for Oil & Gas

In an earlier post we’ve discussed how Africa is becoming a new frontier for oil and gas exploration for western countries as well as new emerging Asian powerhouses like China and India. We review one country – Ghana which is emerging as an oil and gas exploration hub.

Ghana was the first African nation to have gained independence from British rule. Since its independence in 1957, the country is slowly yet surely moving forward with the help of abundant natural resources especially minerals like gold, diamond, bauxite and manganese. What makes Ghana important to the oil and gas industry is the presence of light oil which was discovered recently in 2007.

As demand for energy has increased in Ghana, many projects relating to the importation of gas via pipeline from nearby Nigeria and Cote d'Ivoire have come up. Although as yet, its upstream oil industry has no crude oil production, Ghana is one of four West African countries with an oil refinery. Oil-derived products supply 70% of Ghana's commercial energy needs and the downstream sector is well structured.

Much of Ghana's emerging oil industry is underpinned by the discovery and early development successes of the “Jubilee field” located in an area straddling the West Cape Three Points and Deepwater Tano contract blocs. The development of the Jubilee field is currently in the first phase, involving the drilling of nine production wells and an additional eight support wells.

Currently, exploration and commercial activity is limited to mid cap players. Texas-based oil exploration company E&P outfit Kosmos is amongst the major players in Ghana’s oil and gas sector, although there have been some reports of Kosmos’ interest in divesting some of its stakes in the country. The other big player is UK based Tullow.

Smaller companies are finding it easier to explore in Ghana than in some of its neighbors in West Africa. This is due in part to advantageous terms of the contract which include factors like no front end payments such as signature or production bonuses; negotiable royalties and income tax; no limit on cost recovery, low rental payments, no restrictions on the repatriation of funds and no import duties on exploration and production equipment and materials.

With such advantages for exploration and development coupled with the quality of light crude, Ghana is poised to be one of the new growth economies in the oil sector.

Think global, hire local

The Oil Boom of the 70’s saw a flurry of oil and gas exploration and production activity in the Middle East. Since there was a dearth of skilled manpower to sustain the fast growth in the region, international and national oil companies turned to experienced staff from overseas to make up for the talent shortage in the region. After 40 years of operation, the situation hasn’t changed much. Though there has been massive growth in the work force, the percentage of expatriates remains the same.

All was okay until recently. There has been an increase in violence directed at expatriates in Saudi Arabia. Meanwhile local unemployment has been growing; Arthur Little’s report released this week highlights how this problem has been growing in the region. Yemen’s unemployment rate is 36%, Saudi Arabia’s is creeping up to 14%.

Finally the cost of expats, typically 2-5 times higher than locals, is also more difficult for NOCs to bear. With the populace seeking to “share the wealth” (eg, the agitations in the Niger delta) governments are interested in greater knowledge transfer, upskilling and general hiring of local talent. The Dept. of Petroleum Resources, Nigeria has recently issued a directive to oil and gas companies to hire local talents instead of expatriates. Similar guidelines are already being provided by licensing and governing bodies in growth regions such as Libya and Iraq.

Instead of viewing such directives as a handicap, International oil companies should make most of the situation to cement their relationships with national governing bodies, while NOCs can build up their image as national champions; giving practical solutions for their country’s expatriates dependence in the future. National oil companies’ aspiration to play a major role in the international energy market is very closely related to building local capability. As they venture into other countries, they will need the expertise to manage their growing international operations.

There is a financial imperative to this calculus too. Block awards and renewals are increasingly tied contractually to local workforce development. IOCs also worry about the approximate 50% of the current expatriate workforce that will retire by the next decade. There is no time like now to build a local workforce that will not only deliver the project at hand but may also be a springboard for regional expansion.